How to rig this character?
If I'm not mistaken: based on what you're saying, you need to change a setting in your bone menu so that this deformation doesn't happen. Un-tick the box that controls this function; moreover, it's highly important that bones are not only correctly placed, but have the right mesh parts parented to them. An example of such is if the model is rotated without updating the bones themselves to accommodate this change (which then comes down to parenting). Such will result in distortion (e.g., a bone is assigned to the other arm instead of the arm it sits on).
For more on the topic of bone deformation see here: https://docs.blender.org/manual/en/dev/rigging/armatures/bones/properties/deform.html
And refer to this image for the deformation box: